Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance

Abstract:
First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise.

This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns. More

Jonathan Lewellen
Dartmouth College – Tuck School of Business; National Bureau of Economic Research (NBER)

S.P. Kothari
Massachusetts Institute of Technology (MIT) – Sloan School of Management

Jerold B. Warner
Simon Graduate School of Business, University of Rochester